A nurse checks his fob watch as the government announces proposals to allow patients to shop around for treatment. Photograph: Ian Waldie/Getty Images

The management of the NHS has been characterised by "monumental incompetence" driven by "too much money given too quickly", which has left some trusts facing severe budget shortfalls, according to a former Labour health minister.

Lord Warner, who served in Tony Blair's administration, said he was not surprised by the tide of red ink in the primary healthcare trusts, which buy care on patients' behalf. He said that in the 21st century the NHS had received more money than it knew what to do with. "It was like giving a starving man foie gras and caviar. The NHS has not managed that largesse well".

Warner was behind the push for market-based reforms who by his own admission lost the fight with Gordon Brown, then chancellor, over how to make public services in health run more efficiently. "Gordon reverted to the traditional Labour line in health, which was to support the unions who are the paymaster of the Labour party in the runup to the election," he said.

But this meant putting off vitally needed change and left a gaping "productivity gap". "Between 1997 and 2007 NHS inputs – by that I mean cash – went up by 60%," he said. "But NHS outputs went down by 4%. Two thirds of the money we put in just went into pay."

Spending on the NHS has risen to more than £127bn, almost a 10th of national income. "Even worse, when you take into account social care health, you find that the Department of Health now accounts for almost a third of public spending".

The former minister said the problem was that there were too many primary care trusts (PCT), which Labour created to commission health services from providers in the public and private sector. As a New Labour insider in the health department from 2003 until 2007, he had a ringside view of how cash gushed into – and out of – the NHS.

"We had 300 PCTs to begin with. That was insanity. There was not enough staff to fill all the executive management positions. The first thing I did was to cut them down to 150. But I wanted to go further and cut the number to 50 or 60."

He said he was thwarted by the Labour backbenches, who feared they would lose vital services from their constituencies. He said he openly advocated a big bang approach rather than a piecemeal strategy. "You have too many acute hospitals in the London. You have maternity services handling only 2,000 births a year despite the fact we know you need 4,000 births a year to make it safe and financially viable."

The comments are echoed by Civitas, the health thinktank, which jointly produced the survey of financial deficits in the NHS with the Guardian, published today. In a recent study it concluded that market forces had so far failed to bring the expected benefits to the health service because ministers and Whitehall still exercised too much control. Primary care trusts, it said, remain weak commissioners, reluctant to break out of the traditional patterns of healthcare.

The scale of the difficulties trusts have encountered first came to light in a little-noticed Department of Health publication, the Quarter 2. In December it noted that despite an overall surplus in the NHS "there are four PCTs forecasting a gross deficit of £36m". At the time insiders said that almost half of PCTs were in the red.

Many trusts admit that they cannot introduce the kind of radical changes envisaged to balance books this year and have seen the government step in. Trafford Healthcare NHS Trust, which predicts a £6m deficit, conceded that "it would not have been possible to make 11% savings in one year without adversely affecting patient care". Instead, it convinced the health department to give it a one-year extension to solve the funding crisis.

The department said last night that it was important to look at the end of year deficits rather than a snapshot. "The Quarter 3 will be published later this month and will also show four PCTs and seven trusts forecasting a year end deficit. The department is working through the SHAs [strategic health authorities] to ensure that all the organisations forecasting an operating deficit in 2009-10 are developing recovery plans to return to financial balance while still maintaining and improving services to patients," it said in a statement.